Financial Analysis Of Tractor Purchase Decision In South Sulawesi, Indonesia: A Computer Spreadsheet Template

Although most of the rice area in Indonesia is still prepared manually, since the early 1980s the government has promoted tractors for land preparation through subsidized loans. This has increased capital investment in agriculture; and for the farmers, the cost of owning and operating tractor has become an important part of farm costs. By the late 1980s, a rapid increase in the number of tractors intensified competition, reducing capacity utilization below an economically viable level. Thus, many tractor owners defaulted on their loans. This study investigates the financial profitability of tractor ownership in South Sulawesi, using a computer spreadsheet. The analysis uses input and output data (technical coefficient) collected by the Consequences of Mechanization Project in South Sulawesi in 1980-81, but introduces 1990 costs and prices to assess profitability under current conditions. The results showed that in 1980, tractors were unprofitable, as indicated by a B-C ratio of 0.87. In 1990, with the 1990 prices applied to the 1975-79 tractor capacity utilization, owners obtained positive net return (as indicated by a B-C ratio of 1.13, an IRR of 27% and a NPV of Rp 1,896,000) when the official contract rates was maintained. Sensitivity analysis showed that changes in critical variables, such as tractor price, contract rates, and interest level result in large changes in B-C ratio, NPV, and IRR. Increasing the initial tractor purchase price by 10%, decreased the B-C ratio to 1.07 (-5%), NPV to Rp 1,246,000 (34%) and IRR to 23% (-15%). Similarly, reducing the contract rate by 20 percent, reduce the B-C ratio to 0.9 (-20%), NPV to Rp -879,000 (146%) and IRR to 6.8% (-75%). In addition, increasing the interest rate from 15% to 30%, reduce the B-C ratio to 0.9 (-15%) and NPV to Rp461,000 (-76%). These results indicate the sensitivity of tractor profitability to parameters controlled by government (subsidized interest rate). Thus, while tractor ownership is certainly profitable, the profitability of future purchasers will depend on government policies at the time of purchase, government willingness to maintain a high contract rate, and farmers willingness to pay this rate.